LS9 Scales Up in Chemical Business As Biofuels Industry Re-Tools

LS9 Scales Up in Chemical Business As Biofuels Industry Re-Tools

October 4, 2012

Bernadette Tansey

The South San Francisco company LS9 recently produced five tons of industrial chemicals from plant sugars at a Florida demonstration facility, a step toward proving that its genetically engineered microbes can manufacture carbon compounds and fuels at a commercial scale.

Chief executive officer Ed Dineen says the private company is eager to raise money to finance the company’s next stage, but it’s harder these days. The company, founded in 2005, has raised a total of $81 million in four rounds of financing, the last of which came in December 2010. That money helped invest in its scientific processes, and a manufacturing plant where it could put them to test at large scale. But the funding environment for clean energy companies today is much more bearish than it was a couple years ago. “General uncertainty about the global economy, Europe, Middle East tensions, and the US election, have put various partner companies in a conservative mode,’’ Dineen says.

Another factor in the funding crunch is the falling stock prices of similar companies, Dineen says. “The track record of companies that have gone public has not been great,’‘ Dineen says. “This has made it more challenging for those of us trying to raise new money.’’

Share prices are underwater compared to their IPO prices for Gevo, Kior, Amyris, and Solazyme—all companies seeking to convert various forms of plant matter into fuels, oils, alcohols, and other compounds that are traditionally made from petrochemicals. Emeryville’s Amyris, the first to go public, was down 79 percent from its IPO price on Sept. 28, its second anniversary as a public company. It has dropped almost 72 percent this year.

Although each company in the class has different technologies and strategies, they affect each other’s fates because they influence investors who see them as a group. In the same way, Facebook’s rise stimulated investment in social media startups, and then its disappointing post-IPO share performance cooled the financing environment for that sector.

Once members of an emerging class go public, investors can also see details in their SEC filings about the mundane practical concerns and roadblocks that can delay revenues from even the most promising technologies.

Both LS9 and Amyris use synthetic biology to turn microbes into manufacturing units. Each has re-designed entire metabolic pathways in microorganisms to make them efficiently produce quantities of marketable chemicals. Once such companies begin to scale up their processes, their fortunes depend less on lab wizardry and more on other factors that no one company can control, such as crop prices, agricultural trade policies, and manufacturing contracts.

Amyris has been building two biofuels plants in Brazil, a major grower of the sugar cane that can serve as a less inexpensive manufacturing feedstock than US crops such as corn, which has shot up in price due to an ongoing drought.

Cheap feedstocks are essential if biofuels companies hope to compete with fossil fuels on the basis of price, according to a February report by Pike’s Research, a firm that analyzes clean technology markets. The need for low-cost feedstocks, along with the current financing hurdles, are barriers to the expansion of biofuels production, even though substantial demand exists, the report says. Many countries have mandated the use of biofuel components for their transportation fleets.

The research firm says the global market for biofuels was $82.7 billion in 2011, and predicts this will increase to $185.3 billion by 2021.

Amyris already sells renewable diesel to fuel about 200 city buses in Brazil, says spokesman Joel Velasco. In its main efforts at expansion, the company has completed about 45 percent of the construction on a plant in Brazil in a joint venture with Grupo São Martinho, one of the country’s largest sugar producers. It halted work on that factory to build a smaller one at the Paraiso Bioenergia mill, also in the state of São Paulo. Amyris expects to start commercial production at Paraiso in early 2013, and will use the lessons learned there when it restarts building at São Martinho, Velasco said.

Amyris will make a compound called farnesene under the brand name Biofene, which can be modified to produce fuels and other commercial products such as industrial lubricants or cosmetics. The company’s focus on fuels, however, was strengthened in July when it amended a collaboration agreement with the international oil, gas, and chemicals producer Total. Amyris will receive $30 million in the third quarter from the Paris-based business, which owns about 22 percent of the Emeryville company.

Dineen says LS9 also has the flexibility to make either fuels or higher-priced, higher-margin products, which he calls “value chemicals.’’ The company has decided to focus on these for now, and its demonstration plant in Okeechobee, Florida has been outfitted to produce tons of fatty alcohols, which are used as surfactants in detergents and other products that make up a $5 billion market.

Dineen said the company hopes to begin commercial production in late 2014 to 2015, and will probably locate its plant in Brazil.

LS9′s current emphasis on specialty chemicals makes sense because its only large partnership deal so far is a joint development agreement with Procter & Gamble to replace crude-oil-based raw materials with sustainable alternatives, says Noubar Afeyan, CEO of Flagship Ventures, an investor in LS9. Procter & Gamble is one of the world’s largest purchasers of detergents, he says.

Afeyan says some companies may have shifted from fuels to chemicals because their yield from the conversion of sugar to fuel is still too low. But LS9′s technology is good enough to make biofuels very efficiently, Afeyan says. The stumbling block is the price of sugar, which makes investors reluctant to finance the large demonstration plants that could prove that renewable production methods can work at a commercial scale, Afeyan says.

“Despite high yields, it still is the case that people are concerned about the high price of sugar,” Afeyan says. That barrier could fall if crude oil prices rose, or sugar prices fell, or technologies improved for converting cellulosic agricultural waste into sugar, Afeyan says.

Prevailing sugar prices have changed LS9′s prediction in 2010 that it would be able to convert sugar to renewable fuel costing $50 a barrel. Dineen now says that a more reasonable target would be $75 to $100 a barrel. While LS9 currently focuses on industrial chemicals, it is still improving the efficiency of its microbes that make fuel compounds, Dineen says.

Like most biofuel companies, LS9 will need to obtain low-cost feedstock if it is ever going to become profitable. But low-cost feedstock is particularly important for LS9, because the company intends to compete with traditional producers on price rather than relying in part on its brand as a sustainable producer. “If the market gives us a green premium, that’s an upside,’’ he said.

Companies may have to adjust continually to volatile market conditions by changing their manufacturing mix, Dineen says. LS9’s technology is flexible enough to switch from one feedstock to another, and its plants could be shifted from one product to another within days.

Although the financing environment is weak at the moment, Dineen says, investors with a long-term view are maintaining their interest in the renewable fuels and chemicals space.

“The technology we’re working on will be commercialized; it will have an impact,’’ he says. “It’s only a question of when.’’